Massachusetts Court Holds No Coverage Under Lawyers’ Malpractice Policy for 93A Claim

In its recent decision in Am. Guar. & Liab. Ins. Co. v. Lamond, 2014 U.S. Dist. LEXIS 103117 (D. Mass. July 29, 2014), the United States District Court for the District of Massachusetts had occasion to consider what portion of an underlying judgment involving violations of Mass. Gen. Laws Ch. 93A is covered under a legal malpractice policy.

American Guarantee’s insured, John Lamond, was sued for alleged misconduct in connection with an underlying real estate transaction. Mr. Lamond was alleged to have learned, prior to the transaction’s closing, that the land his client intended to purchase was an Indian burial ground and thus subject to various use restrictions. Mr. Lamond nevertheless certified to his client’s mortgagor that title to the land was free from any encumbrances. After the transaction, the truth about the property was learned, and Mr. Lamond’s client was unable to develop the property. As a result, Mr. Lamond’s client defaulted on his mortgage, and the mortgage company eventually foreclosed on the property, although it too was unable to use or sell the property.

Mr. Lamond and his client were subsequently named as defendants in a suit brought by the mortgage company, and the client, in turn, asserted direct claims against Mr. Lamond for professional negligence and violations of Mass. Gen. Laws Ch. 93A for alleged deceptive acts and practices. These claims were tried to jury, and the client was awarded $20,000 in connection with the professional liability count, representing fees paid to Mr. Lamond, and $397,000 in connection with the 93A claim. Further, the jury doubled the 93A award based on a finding that Mr. Lamond had acted willfully. The jury also awarded Mr. Lamond’s client $111,190.62 in attorneys fees pursuant to 93A.

While American Guarantee defended Mr. Lamond in the underlying action, it sought a declaratory judgment that it had no duty to indemnify any aspect of the jury verdict. It argued that several exclusions in its policy relating to awards for intentional misconduct precluded an indemnity obligation. Specifically it relied on the following exclusions barring coverage for:

4.   criminal or civil fines, penalties (statutory or otherwise), fees or sanctions;

5.   punitive, exemplary or multiple damages; . . . [or]

7.   legal fees, costs and expenses paid to or incurred or charged by the Insured, no matter whether claimed as restitution of specific funds, forfeiture, financial loss, setoff or otherwise, and injuries that are a consequence of the foregoing.

Additionally, the policy contained an exclusion barring coverage for:

… any Claim based upon or arising out of, in whole or part: . . . any intentional, criminal, fraudulent, malicious or dishonest act or omission by an Insured; except that this exclusion shall not apply in the absence of a final adjudication . . . that the act or omission was intentional, criminal, fraudulent, malicious or dishonest.

The court readily agreed that the $397,000 awarded under 93A, along with the doubling of this award, fell within the various policy exclusions because the award “stemmed directly” from a finding of willful and knowing misconduct, and thus at the very least qualified as “malicious” conduct as required for the exclusion applicable to acts or omissions of a malicious nature. The court reasoned similarly with respect to the award of legal fees to Mr. Lamond’s client, since such amounts were punitive in nature and thus barred by the exclusion relating to punitive damages.

American Guarantee also argued that it had no duty to indemnify the $20,000 award relating to professional negligence because this was merely a return of the fees paid by the client for Mr. Lamond’s initial legal services. Based on statements made during closing arguments, as well as in Mr. Lamond’s motion for a new trial, the court found credible evidence that the $20,000 represented a return of legal fees, and thus was excluded based on the policy’s exclusion applicable to legal fees charged by the insured.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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